What is the main business advantage of SaaS products?
SaaS are usually accessible via monthly and/or annual subscriptions, sometimes via a lifetime plan option. This pricing method generates recurring predictable revenues, which is expressed as MRR (monthly recurring revenue) and ARR (annual recurring revenue). As long as the numbers go up, you're on the right track. The more loyal your users are, the higher your LTV (Lifetime Value) will be, and the more money you'll be able to invest to acquire new users (CAC = Cost of Acquisition), deploying a set of smart growth tactics.
Your LTV should always be higher than your CAC (you can't spend more per customer than the lifetime revenue the account will generate). The difference between CAC and LTV will determine how long it will take to break even, i.e. recoup acquisition expenses, to generate a positive ROI (Return On Investment). The shorter the period, the easier it will be to manage your cash flow.
What makes a digital product a great SaaS?
The main risk faced by SaaS owners is churn, i.e. users leaving the platform. There are two types of churn: user churn (the % of users leaving your service) and revenue churn (the % of revenue lost due to either cancellations or downgrades). Churn can be compensated either via user acquisition or revenue expansion.
Since SaaS are priced via monthly and/or annual plans, your customer should perceive an actionable value on a regular basis. Ideally your SaaS should be part of their daily workflow. Usage frequency is key to the sustainability of your SaaS.
Moreover, your customer should develop a strong bond with the product by investing time into the platform, which will minimise the risk of churn. You should find a balance between ease of use and commitment, to develop a subtle / acceptable lock-in effect.
If it only takes one click to join and one click to leave, without any meaningful impact on the customer's business, you'll run a risk of quickly losing users if a competitor offers a better service or a better price.
When a SaaS only ticks one of the boxes...
Recently I had the opportunity to analyse the P&L of a social media content planner (similar to Buffer, Later or Planoly). It had a decent MRR, the valuation wasn't too crazy (c. 25 x MRR) but, on a daily basis, it was losing almost as many customers as it was adding new ones, forced to invest roughly 50% of MRR in paid acquisition to compensate the constant cancellations.
The business met the first condition above: it was part of the daily workflow of its customers, used to plan content sharing on Instagram, Facebook and Twitter. But it didn't tick box #2... It's very easy to join a social media content planning platform. You simply have to connect your social media accounts, in 1 or 2 clicks, via an API-based authentication method. There isn't much data stored on the planning platform (since you usually have a copy of the statistics on the social media platforms themselves) and the content you've shared is by essence obsolete, there isn't much value in the archives (which you can easily export). So it's not a big deal to leave one of those platforms and move to another one. If you have five social media accounts to connect, it will usually take less than 15 minutes. This type of business has almost zero stickiness. This might explain why HootSuite, which was once (almost) valued $1B, hasn't confirmed its unicorn status.
Moreover, it's worth noting that for users who just need to schedule content on specific channels (e.g. Facebook + Instagram), this type of product competes with the social networks themselves, which have been adding advanced planning features to their basic free toolkit. Creative tools have also entered the space. Canva offers scheduling as part of their Pro plan. The planning feature has been completely commoditised, offered as a free bonus. I wouldn't invest in a standalone social media planning tool.
What makes a SaaS sticky?
A SaaS product will be sticky, i.e. hard to leave, if it's integrated in your users' business framework and if they've invested a lot of efforts to configure the integration.
Perfect examples of sticky products would be automation platforms like Zapier or Integromat. If you've invested hours setting up sophisticated automation rules between different tools (beyond the basic If This Then That scenarios), you will hesitate to leave the platform. Even if there are very good reasons for instance to use Integromat instead of Zapier (in my opinion, to name a few: better UX, cheaper price plans and unlimited scenarios). If you have 50 active multi-step zaps on Zapier (which is the maximum for the professional plan, priced $49/month), it might take a few days to switch from one platform to the other, with the risk of losing data in the process. Even if you could replicate your automations on Integromat for $9 per month.
How can you check where you stand versus the competition?
What is a good MRR? What is a good churn rate? There's no definitive answer to the question (except for as high as possible for MRR and as low as possible for churn ) but you can get a sense of where your product stands vs the competition by visiting Baremetrics Open Benchmark page.
You will learn for instance what's the median MRR based on the average revenue per user (ARPU), as well as the typical LTV, user and revenue churn for each ARPU cohort. Numbers are based on actual anonymised data from Baremetrics customers.
You will also learn the pricing points of the most popular monthly and annual plans. Here's a snapshot of the data at time of writing (April 2021).
Can a great UX save a bad offering?
Most experts will emphasise the need of a great user experience to optimise the conversion of a product (CRO, for Conversion Rate Optimisation is the acronym you'll come across in all growth hacking publications). I won't disagree but I also want to stress, as a conclusion, that a great UX will never save a bad offering.
If your product doesn't tick both boxes above: usage frequency and stickiness, your LTV won't be significantly boosted by the most effective onboarding flow or all the UX bells and whistles you can dream of. At the end of the day, it's just plain common sense: you have to give your users a very good sustainable reason to stick with you and keep on paying their monthly / annual fee.